Lenders Looking Hard at Tenant Financials

CARLSBAD, CA—Office buildings that are losing long-term tenants have become a red flag for cautious CMBS lenders, New York-based Trepp LLC's research analyst Sean Barrie tells GlobeSt.com. We have learned exclusively from Barrie that the $27.75-million loan for Carlsbad Corporate Plaza, a 76,159-square-foot property built here in 1999, was sold at a 47.69% loss this month, which raises the question of how common this occurrence is in the current economy. We spoke with Barrie about that and what we can learn from this example.

GlobeSt.com: What happened with the sale of the loan for Carlsbad Corporate Plaza?

Barrie: The special servicer determined the loan could not be amended in some other fashion than liquidating it for a loss. It appears the mortgage was severely distressed, but while $10.1 million on a $21.25-million loan is not good per se, it's certainly not a disastrous number. I don't have any data on the purchaser, but it's possible they were looking to take on junk debt and have it on an asset class. What's interesting is that, according to the commentary, as recently as March of this year, the servicer entered three renewals and four new leases—29,000 square feet of ongoing leasing—and it was listed for sale. It ended up filling a lot of space, so they put the occupancy at a pretty good level.

GlobeSt.com: Was previous distress with the loan the only reason it was sold at a loss?

Barrie: That certainly could be the case. Some properties are never able to recover from a bad year. The most recent financials were from the first nine months of 2014, and net cash flow was just about $213,000. I would have to estimate on the last quarter—with $1.2 million in cash flows from the previous year. The debt service coverage ratio was at .97 in 2013, but at the first part of 2014 it was .17—anything above 1.25 is OK.

GlobeSt.com: Are sales like this a common occurrence, given the amount of distress the market has seen in recent years? Why or why not?

Barrie: It is common, although it's certainly not the norm, for loans to close out at a loss. Of all the trends we've seen so far, sales for loss is turning in the right direction.

GlobeSt.com: What else should our readers take away from this example?

Barrie: Office buildings losing tenants that have been there for a while are a red flag to borrowers and lenders. Lending banks are taking a hard look when they issue a CMBS loan for an office property. They're looking at who the tenant is and how their financials are doing. I don't know what the level of departures was for this property, but this is being taken into consideration, especially with loans coming due in the next two to three years. Another example of lost value in loans on San Diego buildings is 8875 and 8825 Aero Business Center. The 8875 building has $13.2 million left on its balance, and the appraisal reduction came to $5.1 million. The 8825 building has a loan with $4.59 million left on its balance, and it was given an appraisal reduction in the amount of $1.52 million.